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The presidential election's final days could present new headwinds for markets and overshadow what are typically major events — a Fed meeting and the monthly employment report.
The Federal Open Market Committee on Wednesday is expected to signal that it is close to raising rates if the economy and financial conditions are right. It could even adjust the language in its statement to point more clearly at its next meeting, in December, as the time when it would hope to raise interest rates.
The employment report Friday, always important, is expected to show that 175,000 jobs were created in October, and that the unemployment rate was a low 4.9 percent, according to Thomson Reuters. There are also dozens of earnings, including Facebook, BP and Pfizer, and other important data, such as Tuesday's auto sales and ISM manufacturing data.
But in the last week of campaigning before the Nov. 8 election, the market could also be vulnerable to headline risk. Markets have been comfortable with the view that Democrat Hillary Clinton looks set to win the White House and that Republicans would likely hold onto the House of Representatives. That would create a status quo situation where there would continue to be gridlock. Wall Street has viewed GOP nominee Donald Trump as too unpredictable, and he has been trailing in the polls.
Friday's revelation that the Federal Bureau of Investigation is reviewing new evidence in connection with its investigation of Clinton's email server shook markets, sending stocks lower. The emails were found during the FBI's investigation into former Rep. Anthony Weiner, husband of a senior Clinton aide. Weiner is under investigation for allegedly sending sexually explicit messages to a minor.
"The market has gotten pretty comfortable with the thought of a December hike which de-emphasizes some of next week's Fed meeting and jobs report, but this election is now turning into a situation with the potential for Brexit-like volatility," said Scott Redler, partner with T3Live.com. Brexit is used to describe the U.K. vote last June to leave the European Union, which led to a temporary market sell-off.
Art Cashin, director of floor operations at UBS, said if Clinton wins, the investigation will be hanging over her. "It certainly means that probably before the inauguration if the Republicans hold the House, there will be an investigation that lasts four years," said Cashin.
Redler, who follows short-term technicals, said there were already some warning signs for stocks without the added election uncertainty. "Breakouts are failing. Stocks are losing upward momentum, and the indices make it seem as if everything is fine and dandy. It's a push, pull," he said.
The closed at 2,126 Friday, a decline of 0.7 percent for the week, but also below a key support level of 2,130. The VIX, the market's fear meter, jumped 5.4 percent to 16.19 Friday, and was up more than 20 percent for the week.
"I guess people are going to wait for the election or closer to it. What if it's Donald Trump and we get some type of Brexit response and we get some kind of harsh down move? The catalyst of Hillary running away with the election seems like it's off the table," he said. "It could lead to a choppy headline-driven market with more volatility in the next week or so."
Redler said he expects traders to prepare to be in a 'risk-off' mode Monday, as they await more clarity on the investigation.
"The market under the surface looks worse than the Dow and S&P," he said. "You have the Russell making new weekly lows. You have oil down almost 3 percent on the week. You have key stocks, Amazon and Apple, not performing well after earnings."
The small-cap Russell 2000 fell 2.5 percent for the week and is now down more than 5 percent for the month of October.
Ari Wald, chief technical analyst at Oppenheimer, said he's watching the Russell's performance and other signs of divergence.
"You're not seeing those warnings signs of a major top of the market. There are some cracks here. We'll see if it continues. [Russell 2000 stocks have] had a near term breakdown but are still above their rising 200-day moving average," said Wald. "Small-cap outperformance is related to broadening breadth. … I don't think it's necessarily a bearish omen for a broad-based sell-off. It's something to watch and it puts the emphasis on large caps on the long side."
Wald said the market will likely stay choppy. "It doesn't look like we're ready to break out of it yet. In an election year, when the incumbent is not up for election, it does put a different spin on the usual seasonality trajectory. In an open seat election, you do tend to have poorer performance in November before gains in December," he said. "It's going to take one of two things. One is we would have to see some sort of capitulation either closer to the 200-day moving average around 2,080 or 2,100 or to see it on the upside. You'd have to break above resistance at 2,160."
The bond market saw its own volatility in the past week, with Treasury yields rapidly rising in a global sell-off. Yields steadied Friday and moved to session lows on the Clinton headlines. The 10-year Treasury note was at 1.84 percent in late trading.
Jeff Rosenberg, BlackRock Chief Fixed Income Strategist, said the rising yields have to do with increasing inflation expectations as well as the fact that central bankers globally are holding off on increasing stimulus. At the same time, the Fed is planning to hike rates.
"Basically, we've unwound the entirety of the move in interest rates post-Brexit. That makes sense given the resilience in the global economy," said Rosenberg. "Do we see scope for a modest increase in rates? Yes." He said the 10-year could move to 2 percent or even 2.25 percent, or more if inflation picks up.
"All of that is contingent on no significant external shock," he said, noting the election could present a shock for the market. "While it may go as expected and not be a major event, there's the possibility it could."
The uncertainty could possibly prompt a flight to safety move, and that would take yields lower. He said unexpected outcomes would be if Clinton were to win and Democrats sweep Congress.
That is viewed as a negative by Wall Street since it would allow Democrats to move quickly on spending, taxes and regulations that might be viewed as market unfriendly. On the other hand, a win by Trump is expected to create its own volatility, in part due to his anti-trade comments.
Oil could also be a factor in the week ahead, since West Texas Intermediate crude futures broke below the key $49 level. Oil was at $48.70 per barrel, down 2 percent Friday and 4.2 percent for the week, its biggest weekly fall since mid-September.
Members of OPEC are meeting over the weekend to discuss reducing output. The lack of progress in reaching a deal has knocked oil lower.
What to Watch
Earnings: Honda, Cardinal Health, Anadarko Petroleum, Diamond Offshore, Tesoro, Tesoro Logistics, Embraer, Public Service, Check Point Software, CNA Financial, Southern Co, Williams Cos, Tenet Healthcare, NextEra Energy, General Growth Properties, Lumber Liquidators
8:30 a.m. Personal Income
9:45 a.m. Chicago PMI
Fed meeting begins
Earnings: BP, Occidental Petroleum, Pfizer, Royal Dutch Shell, Archer Daniels Midland, Coach, Cummins, Discovery Comm. Kellogg, LyondellBasell Inds, Martin Marietta Materials, Molson Coors Brewing, Sony, Thomson Reuters, Noble Energy, Molson Coors, Electronic Arts, Pioneer Natural Resources, Western Union, Tableau Software, Western Union, Gilead Sciences, Etsy, Zillow, U.S. Steel, Newfield Exploration, Owens and Minor, Papa John's, Square, Wingstop
Monthly vehicle sales
9:45 a.m. Manufacturing PMI
10:00 a.m. ISM manufacturing
10:00 a.m. Construction spending
Earnings: Facebook, AIG, Qualcomm, MetLife, Allstate, Continental Resources, Avis Budget, 21st Century Fox, Allergan, Time Warner, Anthem, Clorox, Alibaba, Fitbit, Estee Lauder, Delphi Automotive, TransCanada, Zoetis, Yelp, NY Times, Och-Ziff Capial Management, Kate Spade, Whole Foods, TransOcean, Plains All American, Marathon Oil, First Solar, La Quinta, Red Robin Gourmet Burgers, LPL Financial
8:15 a.m. ADP employment
2:00 p.m. FOMC statement
Earnings: Kraft Heinz, CBS, Starbucks, Las Vegas Sands, Activision Blizzard, Credit Suisse, Cigna, Encana, Adidas, AMC Networks, Church and Dwight, Chesapeake Energy, Fortress Investments, S&P Global, Scotts Miracle-Gro, Hyatt, Pinnacle West, Time Inc,G FireEye, GoPro, Fossil, Ambac, Twilio, Weight Watchers, Noodles and Co, Lions Gate, TrueCar, TiVo, Skyworks, El Pollo Loco
8:30 a.m. Initial claims
8:30 a.m. Productivity and costs
9:45 a.m. Services PMI
10:00 a.m. ISM nonmanufacturing
10:00 a.m. Factory orders
8:30 a.m. Employment report
8:30 a.m. International trade
4:00 p.m. Fed Vice Chairman Stanley Fischer at IMF on policy changes after great recession